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King Hamad bin Isa Al-Khalifa has chalked up some successes in the past weeks in his drive to steady his island country after the shocks of mass unrest and a violent crackdown, but analysts say business stands no chance of getting back to usual without deep political reforms.

The kingdom reported on Sunday that its economy grew by 1% quarter-on-quarter in April-June after shrinking in the previous three months during the peak of the turmoil. Two days earlier, Bahrain was awarded a slot in the global Formula One schedule in 2012, a boost for the country’s key tourism industry and a vote of confidence after this year’s race was cancelled because of the unrest.

But for every advance, Bahrain has had to contend with a setback. In the space of two days in mid-August, one French lender Credit Agricole was reported to be moving its regional headquarters out of Bahrain while another, BNP Paribas, was said to be dispersing some of its back-office operations around the Gulf -- twin blows to a country that prides itself as the region’s first financial center.

“The situation will never stabilize itself until there is a political solution. We don’t even have the makings of that at this time,” Salman Shaikh, director of the Brooking Doha Center on Qatar, told The Media Line. “The problem with this situation is that the longer it goes on, the more difficult it will be to control the protest movement.”

In an event that pointed out the fragility of Bahrain’s political
situation nearly six months after Saudi and United Arab Emirates (UAE)
forces put down protests at King Hamad’s request, the kingdom was
briefly shaken by street fighting between demonstrators and police after
the alleged killing of a 14-year-old boy last week.

Bahrain has been the only Gulf country to be swept up in the Arab Spring
turmoil. It is a tiny, oil-poor country, but is of key concern to its
neighbors and to the US, which bases the Navy’s Fifth Fleet there,
because it is located in the waters between Saudi Arabia and Iran. Its
mixed population of Sunnis and Shiites makes it a flashpoint in the
sectarian cold war between the two Muslim sects.

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Since he imposed martial law and brought Saudi and UAE forces into the
country, King Hamad has made some gestures of political reform, creating
a National Dialogue Commission to discuss change with the country’s
majority but marginalized Shiites. Also, at the end of August, he
announced pardons for many political protesters while urging workers who
had been sacked from their jobs for joining demonstrations to be
reinstated.

But the severity of the crackdown – which left about 30 dead and led to
the arrest of some 1,400 people, many of them still in prison – has left
many Bahrainis feeling alienated and disillusioned. Small-scale clashes
between police and mostly Shiite demonstrators have become nightly
events since King Hamad lifted emergency rule in June.

Last Tuesday a group of Bahraini doctors on trial on charges of
terrorism began a hunger strike to protest their treatment, including
claims of torture. A day later, 14-year-old Ali Jawad died after he was
shot in the head, opposition activists said, setting off 24 hours of
street fighting.

The government has hired the Washington public relations firm Qorvis
Communications, which counts Saudi Arabia among its clients, to upgrade
its image abroad. But Shaikh said not enough was being done to create an
inclusive domestic political structure.

“We see an increasingly radicalized youth. Young Shiite radicalized
youth in Bahrain is not a movie you want to play over and over again,”
said Shaikh. “Even if the opposition is somewhat disunited, there has
been some ingenuity in keeping the protest alive. You’re seeing hunger
strikes and flash protests taking place in the villages.”

Industry and Commerce Minister Hassan Fakhro told Bloomberg News on
August 22 that consumer and business confidence is almost back to
normal. He said the number of new companies registering with the
ministry in May-July was 30% higher than the same time last year, while
the number of shoppers at City Center, Bahrain’s biggest shopping
center, was up 8.5% in July from a year ago.

But the moves by Credit Agricole and BNP Paribas could set off a run of
banks, undermining Bahrain’s status as a regional banking and finance
center. Some $10 billion in mutual funds are managed in the kingdom and
its banks hold assets of about $211 billion.

“The main drivers seem to be manufacturing and oil. Financial services
were flat, which is better than people expected because there was a lot
of talk about services going to Dubai,” Said Hirsh, Middle East
economist at London-based Capital Economics, told The Media Line. “But
the entire services sector is still at risk.”

Hirsh said he expected government spending would compensate for tepid
growth in the private sector. Saudi Arabia has committed to giving
Bahrain $1 billion annually over the next decade, equivalent to 5% of
GDP. In July, Central Bank Governor Rasheed Al-Maraj forecast the
economy to expand by 3% this year.

Analysts said Bahrain’s stability will be tested by two political events
in the coming weeks – September 24 elections for seats in parliament to
replace lawmakers from the Al-Wefaq party, who resigned last February,
and the final report of the Bahrain commission of inquiry due out
October 30.

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